Cheaper junk mail? Newspapers decry U.S. Postal plan

View full sizeAssociated Press fileThe U.S. Postal Service is proposing to cut its rates for one of the nation's top direct marketing companies, a move that threatens the newspaper industry's biggest money-maker: the Sunday advertising bundle.

LOS ANGELES -- The U.S. Postal Service is proposing
to cut its rates for one of the nation's top direct marketing companies,
a move that threatens the newspaper industry's biggest money-maker: the
Sunday advertising bundle.

The post office expects to generate
$15 million in profits over three years by cutting what it charges
Valassis Communications Inc. for new mass mailings. Livonia, Mich.-based
Valassis sent more than 3 billion pieces of so-called junk mail through
the post office last year. Under the proposal, Valassis has promised to
send even more bulk mail. On those additional mailings, the Postal
Service will give the company a discount of up to 34 percent. Valassis
has agreed to pay a penalty if it does not boost its use of the mail
service.

The newspaper industry says the deal is unfair and could
wipe away $1 billion in annual revenue it gets from Sunday newspaper
inserts and the advertising fliers it sends to non-subscribers during
the week.

Valassis would be able to cut prices and attract
advertisers like The Home Depot, Lowe's and JC Penney away from Sunday
newspapers and toward its midweek bundle of fliers, called RedPlum.
Valassis reaches 100 million homes every week and its clients include
companies ranging from L'Oreal to DirecTV.

The Home Depot said in a
statement that it has no plans to change distribution of its weekly
advertising inserts away from newspapers, "but we are always evaluating
new opportunities and options available in the marketplace."

Ruth
Goldway, the Democratic chairman of the Postal Regulatory Commission,
says the commission is reviewing the proposal with a critical eye. She
acknowledges that the U.S. Postal Service has been "not very good" at
predicting the negative consequences of its actions. But she says
Congress has encouraged this kind of deal-making with the private sector
in order to make the Postal Service "more businesslike."

"Even if
we only make $15 million, but we increase the amount of volume in the
mail and we get various businesses to think positively about using the
mail in the future, then this is something good to do," she says.

The
battle over mass mailing rates pits two old-world entities in a
struggle for survival in the Internet age. The 237-year-old postal
service's mail deliveries are declining as people communicate through
e-mail, Facebook and Twitter. Even in the midst of a multibillion-dollar
cost-cutting plan that includes the closure of 250 mail processing
centers through 2014, the service expects to lose $14.1 billion this
year.

"Our financial condition compels us to seek new revenue
opportunities," the U.S. Postal Service said in a statement to The
Associated Press.

At the same time, newspaper subscriptions and
print advertising revenue have plunged as more people get their news
online. At its peak in 2005, U.S. newspapers took in $49.4 billion in
advertising revenue, both in print and online, according to the
Newspaper Association of America. Last year, that figure had fallen to
$23.9 billion. In that time, the industry has suffered waves of layoffs
and newspaper bankruptcies.

The Associated Press is owned by U.S. newspapers and broadcasters.

Newspapers
see the post office's proposed discounts as a direct attack on the
Sunday newspaper, which is still delivered to subscriber's doorsteps
literally overflowing with ads. Many newspapers would respond to the
proposed deal by using cheaper but less reliable third-party firms to
deliver fliers instead of the post office.

Many small town
newspapers are delivered through the mail, and large metropolitan
dailies use the post office to deliver fliers to non-subscribers.

"You're
giving our biggest competitor these deep discounts," says Paul Boyle,
senior vice president of public policy for the NAA. "We're going to have
to respond to those discounts by lowering rates and lowering our
costs."

The NAA's estimate for $1 billion in revenue losses is
based on its survey of half its 806 member newspapers, including
companies such as The New York Times Co., The McClatchy Co. and Gannett
Co. Inc. Newspapers estimate that more than a third of the $2.5 billion
in annual ad revenue they get from retailers of durable and semi-durable
goods such as clothes, furniture and appliances could be siphoned off
by a lower-cost alternative.

Some small newspapers would be put at
an immediate disadvantage. The Courier-Times, a 7,200-circulation
newspaper that publishes twice a week in rural North Carolina, says it
could lose a significant chunk of the $100,000 a year it collects from
ad inserts. For a newspaper with $1.5 million in annual revenue, that's a
big loss.

Publisher Brinn Clayton says the newspaper would have
no means of lowering costs to compete with Valassis since it relies on
the U.S. Postal Service to deliver about half of its papers.

"There's
nowhere else for us to turn. We can't deliver our newspapers as cheaply
as (the post office) can," Clayton says. "We're kind of over a barrel."

"At
the very least, it would certainly force us to reconsider our
decades-long partnership with the post office," said The McClatchy Co.
CEO Pat Talamantes, in an email.

The Washington Post says it could
lose about 12 percent of its annual print advertising revenue if the
post office's plan gets approved. Last year, the Post's print ad revenue
was $264.5 million.

"There's no way this passes the test of not
causing unreasonable harm to the marketplace," says the Post's vice
president and counsel, Eric Lieberman.

"The
continued erosion of newspaper subscribers has created a market need
for an alternative distribution channel," said Steve Mitzel, senior vice
president of shared mail for Valassis, in a statement.

The Postal
Service's plan must be approved by the five-member Postal Regulatory
Commission, which has been reviewing the deal since early May. A ruling
is expected in the next few weeks.

The outlook isn't promising for
newspapers. The commission has never in its 42-year history denied an
application for a so-called "negotiated service agreement" related to
its mail delivery monopoly, according to Postal Regulatory Commission
spokeswoman Ann Fisher.

The U.S. Postal Service is allowed to
forge such agreements if it believes they can help improve its finances,
enhance its operations and not unreasonably harm the marketplace.

Over
the last decade, the post office has offered special discounts on mass
mailings to companies such as Capital One Services Inc., Bank One Corp.,
Discover Financial Services Inc., and Bank of America Corp.

However,
critics say the discounts don't always produce the intended boost in
mail volume and profits. In 2006, the postal service became legally
required to report the results of such deals. The eight negotiated
service agreements in effect from 2007 to 2011 have lost money instead
of generating new income. The total losses: $20.9 million, according to
the PRC's Fisher.

The U.S. Postal Service has offered other
discounts on delivery of non-monopoly products like small packages,
which have mostly been profitable.

Malin Moensch, the public's
representative appointed by the Postal Regulatory Commission to analyze
the latest proposal, says the U.S. Postal Service fundamentally
misunderstands the economics behind its monopoly on mail delivery. Its
sole legal authority to put items inside people's mailboxes gives it
monopoly pricing power, Moensch says. When it raises prices, customers
have no choice but to pay for the service, so revenue goes up. If it
offers discounts, revenue will go down. Although there are alternatives,
like leaving packages on doorsteps, porches and driveways, there is
only one route to the mailbox and that's through the post office.

"If
you lower prices for market-dominant products, which are insensitive to
price changes, you'll give up more revenue than you will gain in
volume," Moensch says. "They're in denial about that."

In his scathing analysis, Moensch called the planned discount for Valassis "lethal to newspapers."

"It's
almost like throwing a grenade in this market," Moensch says. "It's
really a way for the Postal Service to use Valassis as a proxy to drive
the newspapers out of that Sunday circular market."

The U.S.
Postal Service disagrees with the public representative's conclusion and
says its plan narrowly targets new mailings from large national
retailers. It points out that different advertising bundles charged at
different rates exist side-by-side today. "The entry of one more
competitively priced alternative will not disrupt this market," it said
in a response to criticisms.

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